EVR

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007 for Evercore Partners Inc., an investment banking firm organized into two segments: Advisory and Investment Management. The reporting period is significantly impacted by a "Follow-On Offering" completed in May 2007, which triggered the vesting of substantial equity awards and a reorganization of the company's capital structure following its 2006 IPO.

Key Financial Metrics

Note: 2006 figures represent the "Predecessor" combined entities, while 2007 figures represent the "Successor" consolidated entities. Direct comparability is limited due to the Reorganization and IPO in August 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 74.4% year-over-year to $155.4 million. Advisory revenue surged 94.0% to $140.8 million, driven by strong M&A activity and the inclusion of acquired entities (Protego and Braveheart). Investment Management revenue decreased 24.2% to $12.3 million, primarily due to the non-recurrence of $5.0 million in portfolio company transaction fees earned in 2006.
• Significant Loss: Despite revenue growth, the company reported a net loss of $39.95 million compared to a net income of $50.6 million in the prior period. This reversal is almost entirely attributable to a $125.9 million non-cash equity-based compensation charge resulting from the vesting of Evercore LP partnership units, RSUs, and restricted stock triggered by the Follow-On Offering.
• Expense Structure: Total expenses increased to $235.0 million from $36.6 million. "Other Expenses" (non-recurring) accounted for $133.8 million, primarily the vesting charge and amortization of intangibles from acquisitions. Operating expenses (excluding other expenses) rose to $101.1 million, reflecting increased compensation for Senior Managing Directors (now expensed rather than treated as distributions) and higher public company costs.
• Liquidity: Cash and cash equivalents increased by $79.2 million to $144.6 million, bolstered by $42.1 million in net proceeds from the Follow-On Offering and strong operating cash flows of $72.9 million.

Guidance, Outlook, and Risks

• Outlook: Management expects to record a loss before income taxes and minority interest for the full fiscal year 2007 due to the one-time vesting charges. The company targets total employee compensation and benefits awards at a level not to exceed 50% of revenue (excluding carried interest and reimbursable expenses).
• Capital Resources: The company has $1.9 million in unfunded commitments to Private Equity Funds. It maintains a strong liquidity position with no material debt obligations other than related party notes and operating leases.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2007. Material weaknesses were identified regarding the lack of an enterprise-wide internal control environment, insufficient personnel with GAAP experience, and lack of formal processes to identify financial reporting risks. Remediation plans are underway.
• Legal Proceedings: The company is involved in litigation regarding a 2003 engagement with High Voltage Engineering Corp. The bankruptcy court ruled in Evercore's favor in January 2007, but the plaintiff has appealed. Management believes the outcome will not have a material adverse effect on financial condition.
• Tax Receivable Agreement: The Follow-On Offering triggered a tax receivable agreement. The company recorded a $36.5 million liability to pay Members 85% of the tax savings realized from the step-up in tax basis of assets. Future payments are expected to be substantial.

Investor Verification Checklist

• Non-Cash Charges: Verify the impact of the $125.9 million non-cash compensation charge on the reported net loss to assess underlying operating performance.
• Internal Control Remediation: Monitor progress on remedying the material weaknesses in internal controls over financial reporting, specifically regarding GAAP compliance and personnel expertise.
• Revenue Recurrence: Assess the sustainability of Advisory revenue growth given the one-time nature of the $5.0 million portfolio fees lost in Investment Management.
• Tax Liability: Review the $36.5 million liability under the Tax Receivable Agreement and the assumptions regarding future taxable income required to realize the deferred tax assets.
• Segment Performance: Analyze the divergence between the strong Advisory segment performance and the decline in Investment Management revenue.